For
a long time to come students will be saved the conventional humiliation of making an
apology for presenting a study of Indian Finance or
Economics. But itwill, on the
other hand, be necessary, I fear, for an equally long period, for them to tender an
apology for the shortcomings of their respective investigations. Even when the treatment
of a subject is analytical, a good analytical study often requires an historical setting.
Unfortunately no spade-work has been done in the field of Indian Finance. Consequently the
difficulties which beset a pioneer in that field are immense. There is occasionally the
difficulty owing to the antecedents of some point not having been quite completely
elucidated. Often there is the apprehension of some error having crept in, and, when there
is hardly anyone to save the student from it, there is nothing but to smart under a sense
of irritating affliction. Not very seldom does it happen that a pioneer student is
jubilant over his find of material bearing on his subject, but it is not without a long
and wearisome search that he is able to sift the grain from the chaff. Again, sources
sometimes prove false guides, so that a perusal of them only
ends in a considerable waste of time and energy.

Precisely
these have been the difficulties besetting the present task. There are no books to prepare
the student for his work and hardly any savant to lighten his labour or set him on the
proper track.Not withstanding
such odds, an attempt is made to make this study thorough
without being too detailed. This has rendered the undertaking quite a laborious one. But I
do not wish to speak of the labour that is involved, nor do I wish to astonish the reader
with what might appear to be a formidable list of books and documents consulted in the
preparation of this monograph. What I am anxious to speak of are its shortcomings. There
are indeed many of them which a well-versed critic may spot out. It is my hope that they
are not of such a character as seriously to impair the value which this monograph may
otherwise be said to possess. My regrets are with regard to only a few of them. I have
specified a date as to when Local Decentralisation of Finance commenced in India; but I
feel that that date may not be the earliest and that there may be a date earlier than that
one given by me. I wish I had settled that point finally. But that would have been a task
analogous to that of searching for a needle in a haystack, and it is doubtful whether the
value of that result would have been commensurate with that labour. Besides, although I am
not confident of my date, my feeling is that later researches may after all confirm my
statement. Another matterwhich
l have not dealt with, but which I would have liked to have dealt
with, was the inter-relation of Provincial and Local Finance. This I had originally
planned to do, but left pursuing it because I found that the
chief subject I was dealing with, namely, the Provincial Decentralisation of Imperial Finance, began to be overlaid by facts and arguments not
germane to that topic. These shortcomings will, however, be removed by a supplementary
monograph on Local Finance in British India, which is well under way and which I hope to
publish before long. Occasional repetitions may also be pointed out as a defect of this
monograph. That they should be avoided is all very well. But where economy in the words of
explanation are likely to obscure, repetitions such as are I
unavoidable must be justified, for the interests of clarification should always outweigh
the tedium they involve.

I
cannot conclude this preface without thanking Mr. Robinson, the Financial Secretary at the
India Office, for many valuable suggestions and for the loan of many important documents
bearing on the subject. I am also thankful to Prof. Cannan,
of the University of London, who has read the rough draft of a small part of the
manuscript. My debt to Prof. Seligman, my teacher at
Columbia University, is of course immense : for from him I
learned my first lessons in the theory of Public Finance. I am obliged to my friend Mr. C.S.Deole
for assistance afforded in the dreary task of reading the proofs.

FOREWORD

The
problem discussed by Mr. Ambedkar in his excellent
dissertation is one that is arousing a growing interest in all parts of the world. From
the very beginning we find fiscal burdens imposed by both central and local governments.
As soon as there was a political organisation, the conduct of war on the one hand and the
provision of local protection and convenience on the other called for expenditures on the
part of both state and local authorities. It was only at a later period that there was
interpolated between the local and the central political organisations the intermediate
form which Mr. Ambedkar calls the provincial government. The names applied to these
various classes of expenditure differ with the authorities themselves. In India, we speak
of local, provincial, and imperial expenditure; in Germany, of local, state, and imperial
expenditure; in the United States and Switzerland, of local, state, and federal
expenditure; in Australia, of local, state, and commonwealth expenditure; in South Africa
and Canada, of local, provincial, and federal expenditure; and in France, of local,
departmental, and general expenditure. In some cases, as in the British Empire, there is
being developed a still more comprehensive class of expenditures, borne by the empire at
large.

The
character and importance of these various classes of expenditure and the relations between
them are undergoing a continual change, due to an alteration in the functions of
government. This is itself largely due to a change in the general economic conditions,
resulting in a gradual modification either of political
structure or of administrative activity. In some countries, as in Canada, Argentine and
Brazil, the provinces are really a creation of the central government; in other countries,
as in the United States, Germany, and Switzerland, the federal government is the creation
of the originally sovereign states. In some countries the intermediate (provincial or
state) government is suffering a loss of importance as compared with the local or central
governments; in other countries, the reverse is true.

With
the increasing pressure of taxation and the development under modern democracies of
augmented governmental functions, the problem of the equitable distribution of burden
among these various forms of government is becoming more or
less acute. What Mr. Ambedkar calls assignments, assigned
revenue, and share revenue, is symptomatic of the choice of methods in all countries. One
of three fundamental plans must be pursued. Either the central or the provincial
government may be maintained by the other, according to the relative degree of strength : in former times, in the United States, and in Germany the
states were supposed to support the central government, either wholly or in large measure;
in modern times, in Canada and Australia, the reverse is true. Or, secondly, distinct
revenues may be allocated to the separate governments :
until recently the federal government in the United States, Germany, and Switzerland was
supported primarily by indirect taxes; the state governments by direct taxes. Or, thirdly,
the revenues may be collected by one government and a portion of the proceeds allotted to
the other : there are many instances of a state or
provincial tax being shared with the federal government, and still more examples of a
federal or central tax being shared with the state or provincial government. In the United
States at present the proper disposition of the inheritance tax as between state and
federal government is fast becoming a burning question; in Germany the fiscal relations of
state and federal government are in the forefront of political discussion.

The value of Mr. Ambedkar's contribution to this discussion lies in the
objective recitation of the facts and the impartial analysis of the interesting
development that has taken place in his native country. The lessons are applicable to
other countries as well; nowhere, to my knowledge, has such
a detailed study of the underlying principles been made.

It
is true that only half of the picture is presented. For the situation has everywhere been
complicated by the entrance of the local authorities into the field; and by their claims
to fiscal consideration as compared with both state (provincial) and general (federal)
demands. In the United States, for instance, the now widely debated problem of financing
the schools is largely dependent for its solution on the proper answer to be given to the
question of fiscal interrelations. To this question Mr. Ambedkar
proposes to devote himself in a subsequent study. If he succeeds in illumining that
situation as successfully as he here deals with the initial problem, he will lay us all
under still deeper obligations.

A
student of Indian Finance has two chief sources of information and guidance open to him.
One is the Annual Budget Statement, and the other is the annual volume of Finance and
Revenue Accounts. Though separately issued, the two are
really companion volumes inasmuch as the financial Statement forms, so to speak, an
exhaustive explanatory memorandum of the annual financial transactions, the details of
which are recorded in the volume of Finance and Revenue Accounts.

Helpful
as these sources are, they are not without their puzzles. A reference to the latest volume
of Finance and Revenue Accounts will show that the accounts therein are classified under
four different categories:(1) Imperial, (2) Provincial, (3) Incorporated Local, and
(4) Excluded Local. But this is by no means uniformly so. For instance, a volume of the
same series before 1870 will not be found to contain the accounts called " Provincial," nor will the accounts styled " Local " be found in
any volume prior to 1863. Similarly, any volume of the Financial Statements before 1870
will be found to divide the financial transactions covered therein intoImperial and
Local only. But a volume of the same series after 1908 curiously enough groups the
accounts not under Imperial and Local but under (1 )
Imperial, and (2) Provincial, while the financial Statements
after 1921 cover only the Imperial Transactions. Nothing is more confusing to a beginner
than the entrance of the new, and the exit of the old, categories of accounts*[f1]The
natural question that he will ask is, how did these different categories evolve, and how
are they related to one another ?

In
the present study an endeavour is made to explain the rise and growth of one of them,
namely, the " Provincial." But in order that there
may be no difficulty in following the argument it is deemed advisable to preface this
study with an outline defining its subject-matter and indicating the interrelations of the
parts into which it is divided. To facilitate a thorough understanding of the subject the
study is divided into four parts, each one
dealing with the Origin, Development and Organisation of Provincial Finance and the final
form in which it was cast by the constitutional changes of 1919. In Part I a somewhat
thorny, untrodden and yet necessary ground has been covered in order to give a complete
idea of the origin of Provincial Finance. While due homage is paid to the adage which
requires students of the present to study the past, nothing more than the past of the
present has been dealt with. In Chapter I, Part I, an attempt is made to present a picture
of the system of Finance as it existed before the inauguration of the Provincial Finance
and to state the causes that called for a change in its organisation. In Chapter II a
rival system of Finance proposed during the period of reconstruction is brought to light
and shown why it failed of general acceptance. Chapter III is devoted to the discussion of
a plan which was a compromise between the existing system and its rival, and the
circumstances which forced its reception.

Having
explained the Origin in Part I, the Development of Provincial Finance is made the subject
of Part II. How far the arrangement followed in Part I is helpful must in the absence of
anything to compare with it be left to the opinion of the reader. In regard to Part II,
however, it is to be noted that the arrangement is different from what is adopted in the
only fragmentary sketch published on the subject of Provincial Finance in 1887 by the late
Justice Ranade. As will be seen from a perusal of Part II,
that one of the features of Provincial Finance was that the revenues and charges
incorporated into the Provincial Budgets were revised every fifth year. Justice Ranade in
his pamphlet, which simply covers the ground traversed in Part II of this study, and that
too up to 1882 only, has taken this feature as a norm by
which to mark off the different stages in the growth of Provincial Finance from one to
another. Consequently, each quinquennial period to him becomes a stage, and in his hands
the history of Provincial Finance falls into as many stages as the quinquenniums into which it can be divided. It may, however, be
submitted that if every revision had changed the fundamentals of Provincial Finance, such
an arrangement would not have been illogical. But as a matter of fact, Provincial Finance
did not change its hue at every revision. What the revisions did was to temper the wind to
the shorn lamb. If the history of the development of
Provincial Finance is to be divided into stages according to the changes in the
fundamental basis thereof, then emphasis has to be laid on features altogether different
in character. Writers on the theory of Public Finance seem to conceive the subject as
though itwere primarily a
matter of equity in taxation and economy in expenditure. But to a Chancellor of the
Exchequer finance is eminently practical with a problem to solve, namely, how to bring
about an equilibrium in the Budget. If we scan the history of Provincial Finance in
British India with a view to discover the method of meeting the problem of equilibrium in
Provincial Budgets and the changes introduced in it from time to time, we shall find that
Provincial Finance has evolved through three distinct stages, each with its own mode of
supply, namely, Assignments, Assigned Revenues and Shared Revenues. Consequently, instead
of following the mechanical plan of Justice Ranade, it is
believed to be more logical and instructive to divide the stages in the growth of
Provincial finance according to the method of supply to the Provincial Governments adopted
by the Government of India. Consequently, Part II, which deals with the Development of
Provincial Finance, is divided into three Chapters:(1) Budgetby Assignment, (2)
Budget by Assigned Revenues, and (3) Budget by Shared Revenues.

This
discussion of the Origin and Development of Provincial Finance is followed in Part III by
an examination of its Organisation. Chapter VII in Part lit
is devoted to the analysis of the hitherto neglected rules of limitations on the financial
powers of Provincial Governments primarily to bring out the fact that Provincial Finance
was not independent in its organisation. The analysis of the true position of Provincial
Finance is, however, reserved for Chapter VIII, in which the conclusion is fortified by a
reference to the character of these limitations, that, notwithstanding the high-sounding
appellation of Provincial Finance, there were neither provincial revenues nor provincial
services as separate from Imperial revenues and Imperial
services, so that instead of being federal in its organisation the system remained
essentially Imperial. Chapter IX discusses how far it was possible to enlarge the scope of
Provincial Finance without jeopardy to the constitutional responsibilities of the
Government of India under the old law.

Part
IV is a discussion of the changes introduced into the mechanism of Provincial Finance by
the Reforms Act of 1919. Chapter X of this Part is devoted
to the analysis of the causes which led to these changes. In Chapter XI a full description
of the changes effected by the new law is given, while
Chapter XII forms a critique of the new regime.

In
view of the fact that students of Indian Finance ordinarily content themselves with the
phrase " Decentralisation of finance," to indicate
Provincial Finance, a word of explanation in justification of what may rather be called
the too cumbersome title of this study. No student of Indian Finance, who is sufficiently
acquainted with the branching off of the system in different directions, will fail to mark
the inadequacy of the phrase Decentralisation of Finance to mean Provincial Finance. If
there were in the Indian system only the Provincial Decentralisation there would have been
no necessity to labour for a new title. As a matter of fact, the starting points of
decentralisation are by no means the same, and the systems evolved through it are quite
different in character. For instance, the centre of decentralisation and the systems
evolved by the policy of decentralisation brought into operation in 1855 were different
from the centre and the systems evolved therefrom by the policy of decentralisation
initiated in 1870. Again, the centre which is gradually being decentralised since 1892, be
it noted, is different from those affected by the decentralisation of 1855 or 1870. To put
it more clearly, thedecentralisation of 1855
was the decentralisation of Indian Finance resulting in

(I)
the separation of Local from Imperial Finance.

The
decentralisation of 1870 was the decentralisation of Imperial Finance resulting in

(II)
the separation of Provincial from Imperial Finance.

And
the decentralisation commencing from 1882 is the decentralisation of Provincial Finance
resulting in

(III)
the separation of Local from Provincial Finance.

Obviously
then, " Decentralisation of finance " far from being indicative of Provincial Finance, is a
general name for this variegated and multifarious process of decentralisation described
above, and it cannot but be confusing to use as a title to the study of one line of
decentralisation a phrase which can be generically applied
to all the three lines of decentralisation distinguished above. In order, therefore, that
this study may not be taken to pertain to a line of decentralisation other than the one it
purports to investigate, it has been thought proper to designate it " The Evolution of Provincial Finance in British India
"with a sub-title, " A Study in the Provincial
Decentralisation of Imperial Finance," where the words Provincial and Imperial must
be read with the emphasis due to them. How careless the phraseology often is may be
instanced by the fact that Justice Ranade's pamphlet
referred to above is styled " Decentralisation of
Provincial Finance." Although it deals with the development of Provincial Finance, it
is likely to be passed over by the student, for its title implies that its subject-matter
must be the growth of Local Finance. If Justice Ranade had
been conscious of the varieties of decentralisation,he would have probably realised that the title of his pamphlet was false to its
contents.

[f1]It
is surprising that the category of accounts, called " Excluded Local," which is
to be found in the volume of Finance and Revenue Accounts, never appears in the Financial
Statement. The author has not been able to trace the reason for its exclusion. In the Madras Manual (Vol. I, Chapter V, pp. 467-9) it is
argued that the ground for the exclusion is technical and consists in the circumstance
that the Excluded Funds are not collected by the ordinary revenue collecting agency of the
Central Government and are not subject to its interference. Another technical ground may
also be found in a ruling given in the third edition of the Civil Account Code (p. 137),
according to which Funds were called Excluded, i.e. from the Financial Statement, because
they were not required to be lodged in the Government Treasury. But a ruling on the same
point given in the seventh and latest edition (p. 122) of the same seems to imply that
every public fund must of necessity be lodged in a Government Treasury. The more probable
explanation is that given in the Moral and Material
Progress Report for 1882-3 (Part I, p. 107), where it is said that these funds have no
place in General Finance because they " consist chiefly of special trusts and
endowments."